Half the phone being shipped this year will have a music player on board, and since a lot of those sales will be basic stripped-down devices for emerging markets it seems reasonable to assume that practically every handset on offer in the Western world will have some kind of music track capability. What does that all mean for the mobile business?

Partly the prevalence of musicphones is simply because it’s technically quite easy to include the amplifier circuitry (which is already there for voice and for polyphonic ringtones) and the software (once you’ve written one music manager app, it only needs a bit of tweaking to guarantee it a long life – assuming you don’t need to switch operating systems).

Admittedly there’s still some tweaking for most manufacturers to do. But Sony Ericsson has obviously set the standard with the Walkman player, and both Nokia and Samsung have produced decent alternatives.

Getting a decent sound out of the mobile has been a tad more problematic; the built-in speaker may be good enough for voice, and we can all make allowances for sound reproduction because we don’t expect a voice on a phone to sound natural. But we’ve been raised on hi-fi from home stereos, and even PCs have excellent speakers these days; the tiny, tinny loudspeaker in a phone doesn’t hack it — not even with actual or simulated stereo, nor with equalizers to fill out the tonal range.

Earphones are the immediate solution, and they have improved dramatically over the past couple of years. Earbuds still aren’t as good as clamp-on headphones, though; at least standard 3.5mm audio jacks are featured on more and more phones now, especially those with serious pretensions to be a music player, so the user can buy and attach a better listening experience. (Which begs the question, why don’t more mobile phone retailers offer superior headsets? And why don’t they sell the headset with the phone, perhaps offering to take the in-the-box earphones in part-exchange to encourage the sale?)

The one significant advance here has been Bluetooth, and especially the A2DP protocol that allows phones to send music wirelessly to a headset. Most MP3 players can’t do this yet; freedom from the cable is one major plus for the mobile.

It’s still a private and exclusive way to enjoy music, however. There’s a strong imperative among the young to share their music, to have it playing while they talk to their friends. That requires a speaker set that more than one person can share, and while there have been some good efforts in this direction – notably from Parrot and Sony Ericsson – we’re nowhere near the kind of acceptance (or the sales levels) that iPod speaker docking stations have.

Opportunity

There’s a real opportunity here. “Music enabled handsets already outsell portable music devices massively”, said Hanna Hallberg, telecom analyst at Berg Insight.

“We expect that the handset is going to become the primary portable listening device.” And Rob Lewis, CEO of Omnifone, put it like this: “The real market is a billion mobiles, not 10 million iPods”.

Despite the success of the iPod and all those me-too MP3 players, most people have yet to join the digital revolution in terms of music. According to a recent Ipsos MORI Engage survey, only 27% of the population actually use a portable digital music player such as an iPod.

On the other hand, the same survey found that mobile phones used by over four fifths of the population can provide consumers with ‘on-the-go’ music. Indeed, 46% of those surveyed agree that they would not buy a mobile unless it can download music.

And a survey of 3,000 consumers last autumn by Entertainment Media Research, in association with law firm Olswang, asked music lovers whether they’d prefer a phone that could play music or a standalone music player that function as a phone. The distinction is largely semantic, of course; even so, the results came down 2:1 in favour of the musicphone – and the preference amongst teenagers is even stronger, with 52% preferring an integrated mobile phone.

Interestingly, even amongst current iPod owners there is a surprisingly strong preference towards the concept of mobile handsets incorporating music players rather than vice versa, with 40% selecting a mobile compared to just 27% choosing an iPod.

Jim Ford, Director of Ipsos Global Media, pointed out that the Engage study also suggests that there are some critical challenges ahead for mobile producers. “For example, 55% of mobile users complain that their phone can’t store as many tracks as they would like, and 46% note that the sound quality on their phone is noticeably inferior to that of a CD.

“Consumer feedback does appear to indicate that there is all to play for in the clash of the technology Titans, to see who will win the lion’s share of the music ‘on-thego’ market.”

Sourcing music

The market for over-the-air (OTA) full track music (meaning not ringtones) downloading is expected to be worth 1.6bn euro by 2012, according to Screen Digest.

But there’s some evidence that it’s not really happening at the moment. The Digital Music survey last autumn by Entertainment Media Research suggested that interest in downloading music to mobiles had begun to stall. Just 11% of consumers were already paying for music downloads on their mobile: only half the level that expressed interest in downloading in a similar survey in 2005.

 

It looks as though the mobile industry did a good job educating early adopters on the downloading process — but the second wave of consumers is just not keen on downloading music directly to the phone. 36% prefer to download music using their home computer, 44% say they aren’t interested in any kind of downloading.

 

On the other hand there’s a lot of sharing going on — 67% share music with friends, and 15% say they share a lot of music.

 

This is not what the industry wants to hear. Clearly most people are getting music on to their handset via a USB connection to their PC, and that’s certainly facilitated by the file transfer software that the handset makers provide with their phones.

 

That’s not what the networks want, or the content owners – the music publishers, the bands, the media companies – or the download services.Copying music from the PC means that the punter doesn’t have to pay for it again (assuming they didn’t download it illegally from the web in the first place). If there’s money to be made from music it’s going to come from downloads.

 

Yet the mobile industry needs to do more to convince consumers, even savvy internet downloaders, of the benefits of mobile downloading if they are to stimulate interest and, ultimately, demand. Right now it’s clear that consumers simply find mobile downloading an unattractive option.

 

The Digital Music survey asked its poll how attractive they found the idea of using a mobile to buy a song just heard on the radio; 11% said the idea was very appealing; another 25% rated it as appealing. But that leaves 64% who though it unappealing or very unappealing. Even though the popularity of mobile downloading seems to have stalled, the survey discovered there are still opportunities as consumers are keen on purchasing music downloads — just not from their network operator.

 

The typical behavioural response of only three out of 10 mobile downloaders on hearing a song they wanted to buy and download to their mobile, is to purchase it immediately from their network operator. And, after all, digital downloads in total are continuing to grow. BPI figures for Q1 2007 count 11.5m single track downloads, up 62% compared to the year before. It just seems that the downloads aren’t being made to a mobile phone, though that’s where the music might end once it’s been ported from a PC.

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Overall though, the thinking is distinctly positive. Here’s Screen Digest digital music specialist Dan Cryan: “This is a really exciting time for mobile music and industry players are jostling to enter a rapidly growing market with the right products and business models. “On the one hand we have Apple’s iPhone, the first generation of which doesn’t lend itself to over-the-air music downloads.

On the other we have a raft of services – subscription and á la carte—being launched by mobile phone operators and digital music providers. These represent very different approaches to buying music for your mobile, with Apple encouraging side-loading from the PC to the phone and the mobile operators encouraging over-the-air downloads.”

Screen Digest’s forecast of explosive growth for the global OTA music download market over the next five years — a tenfold increase from 2006 – is based on Japan taking almost 60% of the total global market. It helps that the Japanese are happy to download music directly to their mobile phones, taking advantage of well established high speed mobile networks which give them the capability to download content quickly. In comparison, European and American consumers choose to download music tracks online and then side-load them to their phones.

But Screen Digest thinks the key development in the mobile music market will be the emergence of subscription-based business models over the next three years – by 2012 Screen Digest believes they will account for two thirds of the worldwide total for mobile music revenues.

Services

Screen Digest predicts two common models for such services come in two flavours – ‘book club’ and rental. With a ‘book club’ subscription, users download a certain number of tracks each month and keep them, even when the subscription expires. With rental, users have access to a very large music library and can listen to everything for as long as they pay the subscription.

Omnifone’s MusicStation is an example of the latter. It’s a service that has been getting a lot of publicity recently; it has also announced its first operator — Telenor Sweden – but claims to have around 30 more network deals in place.

MusicStation will be embedded by participating operators in devices, and Omnifone is predicting that it will have addressable handset base of 100m within 12 months.

MusicStation is based around a Java app that can turn the vast majority of phones into devices that can stream, download and play full tracks. It’s a flat-rate all-you-caneat service for a fixed weekly subscription (typically less than 3 euro) which includes all downloading charges. That charge appears on the user’s mobile bill.

That makes it a different approach to the typical operator offering, where individual tracks are sold on a strictly pay-perdownload basis. Here’s Rob Lewis, CEO of Omnifone: “There are lots of pay per download services out there and they’re not doing well enough to get on the operator CEOs’ radars. Our approach of unlimited music for a fixed fee has to be the way forward. We’re looking forward to a very exciting 12 months.”

All the major UK networks offer mobile music services, of course, but usage and revenues are still low – even for 3, which has emphasised its pre-eminence in this area.

According to the statistics it reported this March, half a million 3 customers regularly download music. That translates into more than one million downloads a month, which in the UK digital download market makes 3 second only to iTunes.

But the numbers are still relatively small. The operators have found it difficult to build services that are genuinely easy to use, and there’s a lot of fear among consumer (entirely justified) that data costs will inflate the actual cost of the downloaded track they thought they had bought at a modest price.

Omnifone says it has the backing of all major music labels and many indies, with over a million tracks available to subscribers.

The music groups get a share of the weekly subscription fee. Users are able to listen to the songs and store them on the phone, but not burn them on to CD or distribute them over the internet. File sharing is encouraged, though only with other MusicStation users.

Another interesting straw in the wind was the $60m acquisition of Loudeye by Nokia earlier this year. Loudeye has aggregated rights and content from major record labels to offer a catalogue of over 1.6m tracks, and “We want to be able to offer the best fully integrated mobile music experience to our customers” according to Anssi Vanjokia, executive VP and general manager of Nokia’s multimedia unit.

“Loudeye brings a number of key assets to Nokia, including a great team of people, a substantial content catalogue, and a robust service platform that will help us to achieve this objective.”

“People should be able to access all the music they want, anywhere, anytime and at a reasonable cost. With this acquisition, we aim to deliver that vision and a comprehensive music experience to Nokia device owners during 2007.”

Operator angles

Current online thinking favours the ‘long tail’ theory with regard to the Internet. As applied to the web accessed via the PC, it makes sense: Francis Keeling of Universal put it this way in a recent T-Mobile panel debate: “(The ‘long tail’ theory) is absolutely true within the iTunes environment, within the PC environment where you’re able to search, have recommendations made to you, discover, browse music, go into depths of catalogue.

“On mobile phone, it’s completely the opposite; it’s chart (music), it’s what the consumer can see on the first screen when they enter the portal, the browser, the recommendation, whatever it might be.

They’re unlikely to go to page two, page three, page four, to be able to look through the catalogue, so as a result, you have completely the opposite effect.”

So the average mobile user sees the (at most) 10 or 20 possible downloads listed on page one of the catalogue. More likely, they’ll be offered a smaller number of tracks – whatever the content owner wants to promote at the time. This doesn’t exactly encourage a lot of downloading, and it limits the amount of money to be made.

It’s clear that mobile operators recognise the problem, and they’re looking for ways to lengthen the tail. Richard Wheeler, head of music partnerships for Orange, recently told an audience at MusicAlly’s digital music convention in Brighton that one answer lay in recommendations – -and that Orange is developing sophisticated demographic identification systems that will be able to come up with pinpoint personal; recommendations.

Sounds ok, though the content owners will still be calling the shots – “Placement is based on the margin we get from the labels” observed Wheeler at the same conference.

“Currently, our content is chosen by an editorial team based on song popularity.

However, we are considering choosing featured content based upon margin.”

That summarises the key issue: it’s not the handset any more – the poor-quality sound reproduction can be addressed by better speakers. Nor is it technical problem of getting music from a distributor or a content owner to the network and ultimately to the handset; that too has been largely solved.

Even the consumers’ attitude to mobile music can be changed.

The real problems lie in the business issues – and particularly the way so many intermediaries (owner, publisher, music library, network, maybe the handset maker, maybe the portal operator) all need a slice of the same pie.

Pricing for mobile music services has to be clear and easy to understand, which among other things means no hidden data loading. It is also important that pricing for mobile music is on a par with that charged for other music services, notably PC downloads – and iTunes has set the bar pretty low with its 99c or 79p price per song.

It is hard to imagine that the user will be willing to pay a premium for each song just to download over the air.

Some of the participants are going to have to take less (unlikely) or be cut out of the loop (possible). Or the music download is going to have to get big enough to provide everyone with a decent share; that’s the interesting option.

 

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PHLING! THAT THING THIS WAY

Oxy Systems’ phling! is an interesting take on mobile music – “phling! radically changes the way users listen to and share music on the mobile phone handset” says the company.

phling! allows the user to stream any music saved on a PC to a mobile phone handset. It’s a downloadable Java application; the user has to leave their PC switched on and connected to the internet, but thereafter whenever they start the phling! app on their phone they’ll be able to connect to PC folders and files that have been marked as accessible to phling!.

Adrian Bisaz, VP of business development for Oxy Systems, points that music downloading isn’t necessarily what the consumer wants – -and it’s not the only way a network can make money out of music. “First and foremost, mobile music lovers want to be able to listen to music they already own, anytime, anywhere. Waiting to get home and plug a mobile phone into a PC with a USB cable sort of negates the advantage of having a wireless device!

“It is clear that consumers will not buy a music download of a track they already own.”

The claimed USP is that phling! is also a mobile music community that allows users to share and recommend their favourite tunes (and podcasts) with their network of friends. “You can read and submit song reviews, find out what your friends are listening to, browse user profiles, discover what’s hot and what’s not, share music playlists, and stay in touch with your friends by posting messages on their bulletin boards.”

“Adrian Bisaz of phling! and Oxy Systems: “What needs to happen is to encourage the consumer to buy new music as they discover it””   Oxy Systems is looking for deals with operators who will bundle phling! with the data for the service; it says it will be able to announce its first European network partnership “in the next few weeks”.

Adrian Bisaz says that subscribers in Europe will pay between 5 euro and 10 euro a month for the service.

There’s no licence fees involved for the music itself – it can handle anything except iTunes-derived tracks, which utilise the FairPlay Digital Rights Management system that Apple refuses to license – but there is the option of adding an instant-purchase option.

Says Bisaz: “What needs to happen is to encourage the consumer to buy new music as they discover it. Consumers in a community of mobile music listeners can see what others are currently listening to, what songs have been rated, what songs are the most played, and find others with similar tastes. The result of these discovery scenarios we expect will be music purchases and downloads from the integrated music store.”

 

 Adrian Bisaz